IRS ERC Withdrawal Process: Eligibility, Steps & Repayment Guide

Table of Contents#

1. What is the Employee Retention Credit (ERC)?
2. ERC Eligibility: Who Qualifies?
3. When Might You Need to Withdraw ERC?
4. Step-by-Step ERC Withdrawal Process
5. ERC Repayment Requirements: Timelines & Rules
6. IRS Voluntary Disclosure Program & Other Correction Options
7. ERC Status in 2026: Moratorium, Deadlines & the One Big Beautiful Bill
8. Common Mistakes to Avoid During ERC Withdrawal/Repayment
9. FAQs About the IRS ERC Withdrawal Process
10. Conclusion
11. References

What is the Employee Retention Credit (ERC)?#

The ERC is a refundable tax credit created under the CARES Act (2020) and expanded by the Consolidated Appropriations Act (2021) and American Rescue Plan Act (2022). It is available to eligible employers who paid wages to employees during specific periods, even if operations were partially or fully suspended due to COVID-19, or if they experienced a significant decline in revenue.

Key Details:

• Periods Covered: March 13, 2020, to December 31, 2021 (original); extended to September 30, 2021, for most businesses, and December 31, 2021, for recovery startup businesses.
• Credit Amount: Up to $5,000 per employee in 2020; up to$7,000 per employee per quarter for Q1–Q3 of 2021 (totaling $21,000 per employee for 2021).
• Claiming Method: Employers typically claim the ERC by filing Form 941 (Employer's Quarterly Federal Tax Return) or amending past returns with Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund).

Important 2026 Update: As of April 15, 2025, the window for filing new ERC claims has officially closed. The IRS continues to process existing claims, and the withdrawal process remains available for pending claims.

ERC Eligibility: Who Qualifies?#

Before diving into withdrawals, it's critical to understand ERC eligibility—since ineligibility is a common reason for needing to repay funds. The IRS outlines two primary eligibility paths for most businesses:

1. Government Order Impact#

Your business was fully or partially suspended during any calendar quarter in 2020 or 2021 due to a COVID-19-related government order (e.g., lockdowns, capacity restrictions).

2. Significant Revenue Decline#

• 2020: Gross receipts in any quarter were ≤50% of the same quarter in 2019. Eligibility ends once receipts reach ≥80% of 2019 levels.
• 2021: Gross receipts in any quarter were ≤80% of the same quarter in 2019 (or 2020, if 2019 data is unavailable).

Additional Eligibility Rules:#

• Business Size: For 2020, employers with ≤100 full-time employees (FTEs) can claim the credit for all wages; those with >100 FTEs can only claim wages for employees not working. In 2021, the threshold increased to ≤500 FTEs.
• Eligible Wages: Includes cash wages, certain fringe benefits, and health insurance costs. Wages cannot overlap with Paycheck Protection Program (PPP) loan forgiveness.
• Exclusions: Government entities, tax-exempt organizations (with exceptions), and businesses started after February 15, 2020, (unless classified as "recovery startups").
• Recovery Startup Businesses: Businesses that began operations after February 15, 2020, with average annual gross receipts of ≤$1 million, may claim the ERC for Q3 and Q4 of 2021 (up to$50,000 per quarter).

The IRS provides an Employee Retention Credit Eligibility Checklist to help employers and tax professionals assess potential eligibility.

When Might You Need to Withdraw ERC?#

ERC withdrawals or repayments are required in scenarios where the credit was claimed incorrectly. Common triggers include:

1. Overclaiming the Credit#

• Miscalculating eligible wages (e.g., including PPP-forgiven wages).
• Claiming for ineligible periods (e.g., after December 31, 2021).
• Exceeding FTE thresholds (e.g., a 2020 business with 150 FTEs claiming wages for all employees).

2. Discovering Ineligibility#

• Later realizing the business did not meet the government order or revenue decline tests.
• Learning the business is excluded (e.g., a government entity).

3. Duplicate Claims#

• Accidentally filing multiple Form 941-X for the same quarter.

4. Voluntary Correction#

• Proactively identifying errors (e.g., via internal audits) and choosing to correct them before IRS notice.

5. Aggressive Marketing by ERC Promoters#

The IRS has warned businesses about aggressive marketing by ERC promoters who misrepresent eligibility. If you were pressured into claiming the ERC by a promoter charging high contingency fees, you may need to withdraw or correct your claim.

Step-by-Step ERC Withdrawal Process#

If you need to withdraw or adjust an ERC claim, follow these steps to ensure compliance. The IRS's withdrawal process is specifically designed for taxpayers whose ERC claim hasn't been paid yet, or those who received a check but haven't cashed or deposited it.

Who Can Use the Withdrawal Process: You can use the ERC claim withdrawal process if all of the following apply:

• You made the claim on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, or CT-1X).
• You filed the adjusted return only to claim the ERC, and you made no other adjustments.
• You want to withdraw the entire amount of your ERC claim.
• The IRS has not paid your claim, or the IRS has paid your claim, but you haven't cashed or deposited the refund check.

Step 1: Review the Original ERC Claim#

Gather all documentation related to your ERC claim, including:

• Form 941 or 941-X filings.
• Payroll records (wages, health insurance costs).
• Revenue data (to verify eligibility).
• Government order documentation (if applicable).

Identify the specific error (e.g., overclaimed amount, ineligible quarter) and calculate the overpayment (the difference between the claimed credit and the correct amount).

Step 2: Submit Your Withdrawal Request#

The process varies depending on your situation:

Scenario A: You Haven't Received a Refund and Aren't Under Audit#

1. Make a copy of the adjusted return with the claim you wish to withdraw.
2. In the left margin of the first page, write "Withdrawn."
3. In the right margin of the first page:
   • Have an authorized person sign and date it.
   • Write their name and title next to their signature.
4. Fax the signed copy to the IRS's ERC claim withdrawal fax line at 855-738-7609. This fax line is only for ERC claim withdrawals. Keep your copy with your tax records.

If you can't fax your request, you can mail it to the address in the instructions for the adjusted return that applies to your business. Track your package to confirm delivery.

Scenario B: You Haven't Received a Refund and Your Claim Is Under Audit#

1. Prepare your withdrawal request using the steps in Scenario A.
2. Do not fax to the withdrawal fax line or mail to the standard address. Instead:
   • If you've been assigned an examiner, communicate with them about how to submit your withdrawal request directly.
   • If you haven't been assigned an examiner, respond to your audit notice with your withdrawal request, using the instructions in the notice.

Scenario C: You Received a Refund Check but Haven't Cashed or Deposited It#

1. Prepare the claim withdrawal request using the steps in Scenario A, but do not fax the request.
2. Write "Void" in the endorsement section on the back of the refund check.
3. Include a note that says "ERC Withdrawal" and briefly explain the reason for returning the refund check.
4. Make copies for your tax records of the front and back of the voided check, the explanation notes, and the signed withdrawal request page.
5. Mail the voided check with your withdrawal request to:
   Cincinnati Refund Inquiry Unit
   PO Box 145500
   Mail Stop 536G
   Cincinnati, OH 45250
   Track your package to confirm delivery.

If You Filed Through a Third-Party Payer#

If you filed your ERC claim through a CPEO, PEO, or other Section 3504 agent, contact the entity that filed the claim on your behalf to request a withdrawal.

Step 3: Await IRS Review#

After submitting your withdrawal request, the IRS will send you a letter telling you whether your withdrawal request was accepted or rejected. Your approved request is not effective until you receive the acceptance letter from the IRS.

Step 4: Amend Income Tax Returns (If Required)#

If the IRS accepts your withdrawal, you may need to amend your income tax return to adjust wage deductions. Consult a tax professional for guidance.

ERC Repayment Requirements: Timelines & Rules#

Repaying ERC is mandatory if you received an overpayment. Here's what you need to know:

1. Timeline for Repayment#

• If you voluntarily correct the error (via Form 941-X), repay the overpayment by the date specified in the IRS notice (usually 30–60 days).
• If the IRS audits your claim and finds an overpayment, you must repay within 10 days of the audit notice.

2. Interest and Penalties#

• Interest: Accrues from the date the overpayment was received until the date of repayment. The IRS uses the federal short-term rate plus 3%.
• Penalties: May apply for late repayment (typically 0.5% of the unpaid amount per month, up to 25%).

3. Repayment Methods#

• Online: Use the IRS Electronic Federal Tax Payment System (EFTPS) or Direct Pay.
• By Mail: Send a check or money order payable to "U.S. Treasury," with your employer identification number (EIN) and tax period noted.
• Offset: The IRS may offset future tax refunds to cover the overpayment.

4. Tax Implications#

Since ERC is a refundable credit, repaying it does not affect your taxable income for the original period. However, you may need to adjust deductions for wages if they were previously claimed (consult a tax professional for details).

IRS Voluntary Disclosure Program & Other Correction Options#

In addition to the withdrawal process, the IRS offered special programs for businesses that already received ERC funds but later discovered they were ineligible.

Voluntary Disclosure Programs (Now Closed)#

The IRS operated two Voluntary Disclosure Programs (VDPs) for erroneous ERC claims:

• First ERC-VDP (for 2020 tax periods): Required repayment of 80% of the ERC received. Application deadline was March 22, 2024.
• Second ERC-VDP (for 2021 tax periods): Required repayment of 85% of the ERC received. Program closed November 22, 2024.

Benefits of the VDP included:

• Reduced repayment amount (80% or 85% of the ERC received).
• No need to repay interest received on the ERC refund.
• No requirement to amend income tax returns to reduce wage expenses.
• The IRS would not charge penalties or interest on the claimed amount if paid in full.
• The IRS would not examine (audit) the ERC for tax periods resolved within the program.

These programs are now closed. If you received an erroneous ERC refund and missed the VDP deadlines, your options include:

• Filing an amended return (Form 941-X) to reduce or eliminate the ERC claim.
• Withdrawing your claim if it hasn't been paid or the check hasn't been cashed.
• Consulting a trusted tax professional for guidance on your specific situation.

Amending an ERC Claim (Reducing, Not Withdrawing)#

If you need to reduce your ERC claim (rather than withdraw it entirely), or if you made other adjustments on your Form 941-X, you cannot use the withdrawal process. Instead, file another Form 941-X to correct the error. Visit the IRS's Frequently Asked Questions about the ERC for details on amending a return.

ERC Status in 2026: Moratorium, Deadlines & the One Big Beautiful Bill#

The ERC landscape has changed significantly since the credit was first introduced. Here's what employers need to know in 2026:

IRS Processing Moratorium#

In September 2023, the IRS placed a moratorium on processing new ERC claims filed on or after September 14, 2023, due to a surge of questionable claims driven by aggressive marketing. The moratorium has since been lifted, and the IRS is now processing all claims—including allowing, disallowing, and initiating audits on claims.

ERC Filing Deadline#

As of April 15, 2025, the window for filing new ERC claims has officially closed. This was the deadline for filing original claims for 2020 tax periods (and the final deadline for 2021 claims). No new ERC claims can be filed.

One Big Beautiful Bill Impact on Late-Filed Claims#

The One, Big, Beautiful Bill (OBBB), signed into law in 2025, introduced new enforcement provisions affecting the ERC. Under Section 70605(d) of the OBBB:

• The IRS is prevented from allowing or refunding ERCs after July 4, 2025, for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024.
• This applies even if the employer otherwise met eligibility requirements.
• If your Q3/Q4 2021 ERC claim was filed after January 31, 2024, and was refunded or credited before July 4, 2025, the OBBB provision does not apply to your claim. However, other IRS compliance activities may still result in an adjustment or bill.

If your claim is disallowed under the OBBB, you will receive Letter 105-C, Claim Disallowed, and may appeal to the IRS Independent Office of Appeals if you believe your claim was timely filed on or before January 31, 2024.

IRS Backlog#

As of early 2025, the IRS had over 597,000 unprocessed ERC claims remaining in its inventory. The IRS has committed to completing processing of all remaining claims. Businesses with pending claims should be prepared for extended processing times.

Disallowance Notices#

The IRS has issued letters for approximately 84,000 returns claiming the ERC, partially or fully disallowing the claims. If you receive a disallowance notice, you have the right to appeal. Review the IRS guidance on Letter 105-C for information on how to respond.

Common Mistakes to Avoid During ERC Withdrawal/Repayment#

To streamline the process and avoid penalties, watch for these pitfalls:

• Failing to Keep Records: The IRS requires documentation (payroll, revenue, government orders) for 4–6 years. Lost records can delay adjustments.
• Ignoring IRS Notices: Respond promptly to IRS letters about ERC discrepancies—delays may lead to higher penalties.
• Overlooking PPP Overlap: Wages used for PPP forgiveness cannot be claimed for ERC. Mixing these is a top audit trigger.
• Incorrect Form 941-X Filing: Mistyping amounts or omitting explanations can cause the IRS to reject your adjustment. Double-check entries.
• Missing the Withdrawal Requirements: The withdrawal process only applies if you filed the adjusted return solely to claim the ERC with no other adjustments. If you made other changes, you must file an amended return instead.
• Using the Wrong Submission Method: Do not fax withdrawal requests to the ERC withdrawal line if your claim is under audit or if you received a check you haven't cashed—different scenarios require different submission methods.
• Assuming Withdrawal Exempts You from Criminal Investigation: If you willfully filed a fraudulent ERC claim, withdrawing it will not exempt you from potential criminal investigation and prosecution.
• Relying on ERC Promoters: Be cautious of companies that charge high contingency fees to file ERC claims. The IRS has identified aggressive marketing as a major source of improper claims.

Warning Signs Your ERC Claim May Be Incorrect:

• You were told "everyone qualifies" for the ERC.
• You were told you could claim the ERC for employee retention alone, without meeting government order or revenue decline tests.
• Your ERC promoter charged a large contingency fee based on the refund amount.
• You were not asked to provide documentation supporting your eligibility.

The IRS provides additional warning signs of incorrect ERC claims on its website.

FAQs About the IRS ERC Withdrawal Process#

Can I withdraw my ERC claim if I already received a refund?#

No. The withdrawal process is only available if the IRS hasn't paid your claim, or if you received a check but haven't cashed or deposited it. If you already received and deposited the refund, you may need to file an amended return (Form 941-X) to reduce or eliminate the ERC claim.

Does withdrawing an ERC claim affect my other tax filings?#

If the IRS accepts your withdrawal, you may need to amend your income tax return to adjust wage deductions. The withdrawal itself does not create penalties or interest.

How long does the IRS take to process an ERC withdrawal request?#

Processing times vary. The IRS will send you a letter confirming whether your withdrawal request was accepted or rejected. The request is not effective until you receive the acceptance letter.

Can I withdraw only part of my ERC claim?#

No. The withdrawal process is only for withdrawing the entire ERC claim. If you need to reduce (but not fully withdraw) your claim, you must file an amended Form 941-X.

What if my ERC claim was filed by a payroll company?#

If your ERC claim was filed through a CPEO, PEO, or other third-party payer, you must contact that entity to request a withdrawal on your behalf.

Is the ERC withdrawal process still available in 2026?#

Yes. The IRS has not announced an end date for the withdrawal process. As of 2026, eligible employers can still file to have their ERC claims withdrawn, provided they meet the eligibility criteria.

What happened to the ERC Voluntary Disclosure Program?#

The IRS operated two Voluntary Disclosure Programs (VDPs)—one for 2020 claims (80% repayment) and one for 2021 claims (85% repayment). Both programs are now closed. The second VDP closed on November 22, 2024.

Can I still file a new ERC claim?#

No. As of April 15, 2025, the filing period for new ERC claims has closed. Additionally, under the One Big Beautiful Bill, the IRS cannot allow or refund ERCs for Q3/Q4 2021 filed after January 31, 2024.

Conclusion#

The ERC has provided critical support to businesses, but ensuring compliance is key to avoiding repayment headaches. By understanding eligibility, recognizing when withdrawal is needed, and following the step-by-step process, you can navigate ERC adjustments smoothly.

With the ERC filing period now closed and the IRS actively processing remaining claims and issuing disallowance notices, it's more important than ever to ensure your claim is accurate. If you discover an error, act promptly—whether through the withdrawal process, an amended return, or by responding to IRS notices.

When in doubt, consult a trusted tax professional to review your claim and guide you through corrections.

References#

• IRS. Withdraw an Employee Retention Credit (ERC) claim. https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim
• IRS. Frequently Asked Questions about the Employee Retention Credit. https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit
• IRS. Employee Retention Credit. https://www.irs.gov/coronavirus/employee-retention-credit
• IRS. About Form 941-X. https://www.irs.gov/forms-pubs/about-form-941-x
• IRS. Employee Retention Credit - Voluntary Disclosure Program. https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program
• IRS. IRS Frequently Asked Questions Address Employee Retention Credits Under ERC Compliance Provisions of the One, Big, Beautiful Bill. https://www.irs.gov/newsroom/irs-frequently-asked-questions-faqs-address-employee-retention-credits-under-erc-compliance-provisions-of-the-one-big-beautiful-bill
• IRS. Help for Businesses: Steps for Withdrawing an Employee Retention Credit Claim. https://www.irs.gov/newsroom/help-for-businesses-steps-for-withdrawing-an-employee-retention-credit-claim
• Taxpayer Advocate Service. The ERC Claim Period Has Closed — The IRS Must Now Prioritize Resolution, Communication, and Taxpayer Protections. https://www.taxpayeradvocate.irs.gov/news/nta-blog/the-erc-claim-period-has-closed/2025/05/
• IRS. Understanding Letter 105-C, Disallowance of the Employee Retention Credit. https://www.irs.gov/coronavirus/understanding-letter-105-c-disallowance-of-the-employee-retention-credit